SelectQuote (SLQT) Q3 2024 Earnings Name Transcript

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These statements are made based mostly upon administration’s present expectations and beliefs regarding future occasions impacting the corporate and due to this fact, contain various uncertainties and dangers, together with, however not restricted to, these described in our earnings launch, Kind 10-Q for the interval ended March thirty first, 2024, and different filings with the SEC. Due to this fact, the precise outcomes of operations or monetary situation of the corporate might differ materially from these expressed or implied in our forward-looking statements. And with that, I would like to show the decision over to our chief govt officer, Tim Danker. Tim?

Tim Danker — Chief Govt Officer

Good morning, and because of everybody for becoming a member of. It was an thrilling quarter for SelectQuote throughout various fronts, and I am going to start as we speak’s name summarising our accomplishments throughout three principal classes. First, our Senior Medicare Benefit enterprise continues to leverage the foundational adjustments we made greater than two years in the past. The enterprise continues to drive robust coverage manufacturing with steady and enticing unit economics.

The quarter marks the ninth in a row that it is overdelivered towards our inner expectations. Particularly, we generated $204 million in income inside our senior enterprise at a 30% EBITDA margin. The result’s one in all our highest senior income for an OEP and SelectQuote’s historical past, which is a superb accomplishment contemplating the conservatism constructed into our LTV assumptions over the previous two years, delivering this top-line efficiency at enticing margins regardless of modest year-over-year will increase in working and advertising and marketing expense is a testomony to our give attention to working effectivity. Moreover, our success in healthcare companies continued within the third quarter with better-than-expected membership development but once more.

Our membership now exceeds 75,000, which is effectively past our forecast set firstly of the yr. We’re extraordinarily happy with the expansion achieved within the phase however are much more excited by the embedded revenue potential and quick money stream profit the enterprise supplies our general firm. Third, as we have spoken about, we proceed to advance down the trail of bettering our funding value and general leverage by the securitization of our receivables steadiness, which at quarter finish stood at over $1 billion. I am going to present a normal overview of how a securitization construction would assist enhance returns and money effectivity for SelectQuote in a minute, however we’re excited in regards to the progress we have made since our final name and look ahead to sharing extra details about the potential transaction after we can.

In sum, SelectQuote has by no means been higher positioned to proceed executing on our purpose of changing into a complete healthcare companies supplier to a big and rising vary of Individuals. We’re excited to see our operational enhancements bear more and more tangible outcomes. Given we anticipate to drive constructive working money stream in fiscal 2024, which is able to compound within the years forward, we consider 2024 can be remembered as an evolutionary milestone to in the end ship the returns we all know our mannequin can generate for shareholders. If we flip to Slide 4, let me give an replace on the working stability we proceed to see in our Singer Medicare Benefit enterprise for the second straight yr and a special sort of MA promoting season, locked has maintained the associated fee and working effectivity enhancements on the core of our strategic redesign.

Our working expense per coverage stays almost 30% under the degrees from our 2021 classic pushed primarily by the shift away from Flex brokers. Our core senior brokers, as you’ll keep in mind, are roughly two instances extra environment friendly in comparison with much less tenured brokers. We have maintained a technique not simply to obese this inhabitants of brokers however to coach them earlier and arm them with more and more superior instruments. This clearly advantages CECO’s working effectivity however higher but, the alignment with policyholders is the place everybody wins, that’s greatest evidenced by our steady persistency in LTV, completely satisfied policyholders to maintain their insurance policies, which is a win for them, SelectQuote and our service companions.

Given our laser give attention to high-quality development, SelectQuote has additionally realized effectivity advantages in our advertising and marketing value per accepted coverage. On common, these prices are down greater than 30% in every of the previous two years in comparison with 2021. Once more, we consider this robust efficiency is sustainable and scalable and a variety of MA promoting seasons, not as a result of now we have a crystal ball and coverage options or competitors, however as a substitute, as a result of we’re purposely concentrating on within the leads we pursue. This helps handle our advertising and marketing prices and improves the general high quality and throughput of the insurance policies we promote.

Lastly, as we have famous in latest quarters, the method enhancements we made in our senior enterprise, mixed with the synergistic development of our Choose Rx enterprise has made a significant distinction within the income a number of we’re driving on our buyer acquisition prices. For the third quarter, our income to CAC once more eclipsed 4 instances, which is now greater than double the place it was two years in the past. On the subsequent web page, let me spend a couple of minutes on the dynamics of a possible securitization deal and why it’s a beautiful funding possibility for our enterprise. Securitization might assist enhance the chosen steadiness sheet in three key methods: First, the proceeds would permit us to repay a substantial portion of our present time period mortgage.

The second profit could be the potential to increase maturities on our present time period loans past 2025. Given these two advantages, the combination debt load and maturity ladder for SelectQuote might be materially improved, and we consider there might be extra alternative to additional enhance our general capitalization and value of capital. That additional enchancment is the third step to bettering our steadiness sheet, which might happen sooner or later by debt paydown and refinancing. Past the steadiness sheet advantages, there are operational advantages from a possible securitization, particularly, securitization can speed up money flows for our Medicare Benefit enterprise and drive higher returns and money effectivity, that are the center of our general worth proposition to shareholders.

On this slide, we have introduced an illustration of how a possible securitization of latest coverage tranches might positively affect the money flows of the only Medicare Benefit coverage in comparison with our present mannequin. As you may see, the important thing profit could be the pull ahead of our payback and the coverage creation. In securitization, we’d anticipate a marked acceleration in comparison with our historic payback of simply over two years. The upfront money stream from this potential funding construction might additional enhance our returns on new insurance policies.

To be clear, a securitization construction wouldn’t affect LTVs or our value to promote a coverage, however as a substitute merely delivers money returns sooner. As well as, whereas a securitization could be structured at a loan-to-value under the sum of money flows, SelectQuote would keep the coverage and the residual worth as soon as the bonds have been repaid. The ultimate key advantages this money effectivity would have for our mannequin is a rising capability to self-fund our enterprise with ahead securitizations. To be very clear, the usage of securitization funding wouldn’t change our strategic crucial to prioritise profitability and returns over development.

Simply because securitization would offer extra liquidity to develop MA insurance policies, our self-discipline in how we’d method the MA enterprise wouldn’t change. In parallel with debt discount, we consider securitization funding might speed up how SelectQuote leverages our holistic mannequin to additional differentiate and broaden our development and revenue alternatives with new value-added companies for Individuals inside a shifting healthcare ecosystem. On the subsequent web page, I am going to briefly converse to our consolidated outcomes for the third quarter. As talked about, we’re more than happy with the steadiness in each coverage development and margin for our core senior enterprise.

Equally, we once more noticed robust membership development for our Choose Rx enterprise and healthcare companies, which elevated over 12,000 this previous quarter alone. As we have mentioned in latest quarters, the fast development of our membership comes at near-term dilution to our general EBITDA margins, which you’ll be able to see right here on the year-over-year examine. That mentioned, it is margin stress we have been completely satisfied to incur based mostly on the embedded economics that exist in our Choose RX and broader healthcare companies phase. To be clear, we stay assured that our Healthcare Companies enterprise has the power to generate double-digit EBITDA margins, which on the bottom of revenues we’re producing grow to be important because the mannequin matures.

Earlier than I flip it to Ryan, I am going to conclude by reiterating my message that SelectQuote has by no means been higher positioned with a powerful working basis to pursue the massive market and worth creation alternative that we all know is ours to take. With that, let me flip the decision over to Ryan to element our monetary outcomes and up to date outlook for 2024. Ryan?

Ryan Clement — Chief Monetary Officer

Thanks, Tim. I am going to start my remarks with extra particulars on the robust outcomes for SelectQuote Senior Medicare Benefit enterprise on Slide 7. As Tim talked about, the important thing takeaway is the steadiness of our monetary outcomes this season in comparison with final. Steady and repeatable monetary outcomes had been our main goal after we redesigned our technique two years in the past, and outcomes like these proceed to validate our technique.

We drove a powerful OED with $204 million of income within the third quarter, representing double-digit development in comparison with final yr. As Tim famous, we had one other profitable quarter for profitability with a 30% EBITDA margin. We credit score the working effectivity and the ensuing profitability to the upper mixture of tenured brokers, enhanced desktop instruments to make sure greatest coverage match and extra targeted method to steer concentrating on. Put merely, we consider SelectQuote’s method available in the market is essentially completely different and our 9 consecutive quarters of robust outcomes as proof of that.

If we flip to Slide 8, let’s reuse SelectQuote by the lens of insurance policies and LTV. First, we grew accepted Medicare Benefit insurance policies by 12% through the quarter. This was made doable by a mix of robust shut charges with our core brokers in addition to the targeted lead sourcing we referenced earlier than. This additionally outpaced general business development, which is a testomony to SelectQuote’s robust buyer acquisition engine.

As we spoke to final quarter, the Medicare Benefit coverage options had been aggressive this season, and we grew coverage rely with out sacrificing high quality. That is all of the extra spectacular when contemplating the power of the market in 2023 and the comparisons we had been up towards. In truth, our LTV elevated to $995 per coverage, which is up 3% from a yr in the past and is now up 7% from the low acknowledged in fiscal 2022. The rise in LTV has been made doable by steady policyholder conduct, which we largely credit score to our core agent combine and the ensuing enchancment in high quality coverage matching with our clients.

Turning to Slide 9. I am going to element our Healthcare Companies phase and SelectRx particularly. As Tim talked about, development stays strong, and our platform surpassed expectations once more, each on member development and income. Particularly, our members grew to $75,000, which is 20% larger than 1 / 4 in the past.

Equally, income of $124 million within the third quarter improved quickly, pushed each by new members, but additionally by the maturation of members now we have added over the course of the yr. Third-quarter income development of 76% in comparison with a yr in the past is a major improve and one which we’re pleased with. Beth mentioned, we acknowledge a rising must steadiness our development with profitability in healthcare companies. And I would wish to take a minute to provide context each on our third-quarter EBITDA outcomes but additionally on our near-term technique for this phase as a complete.

As you may see, our Healthcare Companies EBITDA of $2 million stays muted, primarily as a operate of onboarding the over 12,000 members that signed up for SelectRx this previous quarter. This was the most important quarterly quantity improve on document. The onboarding prices related to these new members masked the steady and enticing margins we earn on prescription gross sales. As new member onboarding moderates sooner or later, we keep that our healthcare companies enterprise can generate double-digit EBITDA margins.

Subsequent, I am going to briefly summarize our Life & Auto & Residence phase, which additionally had a steady quarter for each income and adjusted EBITDA, which had been $50 million and $7 million, respectively. Much like prior quarters, the Auto and Residence division’s robust efficiency was as soon as once more pushed primarily by a mix of robust agent productiveness and better industrywide premiums. The Life division grew revenues by over 10%, fueled particularly by a powerful quarter for the ultimate expense enterprise. As a reminder, these enterprise strains proceed to profit SelectQuote’s general money effectivity.

Lastly, let me evaluate our up to date fiscal ’24 outlook on Slide 11. As Tim talked about, we’re elevating our income expectations to $1.25 billion to $1.3 billion, which on the midpoint represents development of 27% yr over yr. That is the second consecutive quarter; rising our top-line outlook and is primarily pushed by the fast adoption now we have seen in our SelectRx membership. For SelectRx particularly, we’d observe that our fiscal fourth quarter is in a seasonally slower interval for member development than AEP for OEP.

Whereas we nonetheless anticipate member development into our fiscal year-end, the tempo can be modest in comparison with the previous quarter. We additionally raised our outlook for adjusted EBITDA, which is now $100 million to $110 million. On the midpoint, this represents development of 41% yr over yr. As I’ve spoken to, we’re completely satisfied to lift our revenue outlook regardless of the extra onboarding expense pushed by our fast SelectRx development.

With that, let me flip the decision again to the operator to take your questions.

Questions & Solutions:

Operator

Thanks. [Operator instructions] Our first query comes from Ben Hendrix with RBC. Please go forward. Your line is open.

Ben Hendrix — RBC Capital Markets — Analyst

Hey. Thanks very a lot and congratulations on the outcomes. I wished to get some extra element on Slide 5, the securitization and the pull ahead of the payback interval looks as if a really compelling construction right here. However simply questioning sort of for this with now, it looks as if your debt ranges could be instantly linked to gross sales in any given yr now.

I simply questioned how you consider steadiness sheet administration and leverage profile of the corporate going ahead beneath this construction?

Ryan Clement — Chief Monetary Officer

Yeah. I imply, with respect to securitization, we do see it as a versatile construction the place as we produce extra insurance policies, we are able to securitize these insurance policies and entry to proceed. So in consequence, it does create an atmosphere the place we are able to delever and pay down the time period debt nevertheless it additionally creates an atmosphere the place it’s self-funding in nature. And so, on a go-forward foundation, we’d anticipate to securitize insurance policies as we produce them sort of on a perpetual foundation.

Ben Hendrix — RBC Capital Markets — Analyst

And I respect the commentary about having the ability to retain all of your tail commissions, and that appears positively like a constructive. The issue is does this amplify on the draw back in an occasion. I do know you guys have accomplished a extremely good job of lowering the standard of your commissions receivable and having a extremely robust confidence there. However might this amplify any draw back danger of adverse tail income?

Ryan Clement — Chief Monetary Officer

I imply in the end, with respect to our money flows, — to the extent persistency had been to come back in worse than anticipated, we’d not acknowledge these money flows. So I do not know that like the chance is amplified. It’s — clearly, we’re securitizing — and clearly, when you find yourself securitizing insurance policies, these insurance policies are based mostly off actuarial research, and so they’re not securitized at a loan-to-value that’s 100%, nevertheless it truly had a reasonably important discount from 100%. So sort of there are mechanisms in place to derisk the general construction.

We do consider that securitization is a beautiful type of financing for the enterprise for shareholders. And it makes a whole lot of sense.

Ben Hendrix — RBC Capital Markets — Analyst

Nice. Thanks. Only one final one on the regulatory atmosphere, the fee guidelines that we have seen come by from CMS. Simply wished to get your newest interpretation there and the way you consider it pertains to what you are promoting line?

Tim Danker — Chief Govt Officer

Good morning, Ben. That is Tim. Thanks for becoming a member of. Thanks for the query.

Sure, our interpretation of the ultimate rule actually appears to delineate. There are completely different guidelines that apply to completely different individuals within the business. So particularly, SelectQuote thought-about a third-party advertising and marketing group or TPMO and based mostly upon the brand new language that got here out, we consider it is CMS’ intention to exclude TPMOs from the price limitations associated to dealer comp. So — we have been actively engaged with our service companions on this concern.

They’ve reiterated the crucial position we play in MA distribution, the worth that we offer beneficiaries and sort of underscored a few of the variations in our mannequin versus others. So we — on the backside line of all that is we do not see this materially impacting our enterprise.

Ben Hendrix — RBC Capital Markets — Analyst

Thanks very a lot.

Tim Danker — Chief Govt Officer

Thanks, Ben.

Operator

Thanks. [Operator instructions] Our subsequent query comes from Pat McCann of Noble Capital Markets. Please go forward.

Pat McCann — NOBLE Capital Markets — Analyst

Hey. Congrats on the quarter and thanks for taking my query. My first query is in regards to the pharmacy enterprise. You talked about through the presentation the give attention to bettering margins as we go ahead.

I used to be questioning in the event you might discuss a bit bit about a few of the levers you pull to try this.

Bob Grant — President

Yeah. I can begin from a enterprise standpoint after which have Ryan sort of take it from a simply normal financial standpoint. It is a enterprise, clearly, that we do not e book in the identical approach that we e book our senior enterprise. And as a buyer will get extra tenured, they add extra medicine per buyer or extra scripts as we get to extra of a full field, their churn truly reduces then the unit economics on the containers truly get higher and higher.

And I feel we have seen that play out as we have sort of made extra money throughout, I would say, intervals the place we aren’t rising fairly as quick. After which like final quarter, we grew actually, actually shortly on the again of AEP, and also you see the economics scale back just a bit bit. However over time, that will get an increasing number of steady and an increasing number of worthwhile per field, and that is how we actually see that taking part in out. Our unit economics on the lifetime of a field have truly gotten considerably higher as a result of we have decreased our churn.

We have elevated the proportion which have full containers and simply gotten higher operationally I would say the opposite space that we’ll actually give attention to operationally is simply as we have got an economic system of scale, one, we get to purchase scripts at a lower cost, proper? After which two, extra importantly, truly, is the automation effectivity we are able to acquire inside the amenities and manufacturing facility itself and we’re hyper-focused on that proper now as we get larger and greater and we get extra tenured. In order that’s why now we have such confidence on the place we’re going from an financial standpoint and really feel actually, actually good about the place we’re. Nevertheless it’s only a maturity of the enterprise and in the end, as these clients play out.

Pat McCann — NOBLE Capital Markets — Analyst

Nice. After which — healthcare — sorry, go forward.

Ryan Clement — Chief Monetary Officer

Yeah. No, I used to be going to name out, clearly, we onboarded 12,000-plus clients, which is — we had been extremely happy with. There’s a short-term value related to that enrollment and onboarding. However drug margins are robust, and we consider that we’re constructing a enterprise with a whole lot of embedded worth.

It is a recurring enterprise mannequin. We acknowledge income as these medicine are being shipped out. In order Bob alluded to, as clients mature an increasing number of going out with full containers, and we’ll see the margin development.

Tim Danker — Chief Govt Officer

Hey, Pat. I would pile on, that is Tim. Another factor, Pat, simply to pile on right here. We have grown the enterprise to the purpose of money stream era.

I’ve accomplished that for 4 consecutive quarters. That was actually a purpose that we set out for the enterprise, going to achieve that inflection level. We’re positively completely satisfied to take that client demand. I imply third quarter was very robust for us, however we’ll steadiness that with managing margins and profitability.

We’d anticipate and we’ll present extra visibility in our fiscal ’25 information right here in August. However simply to double down on what Ryan mentioned. I imply we do consider that — on a long-term foundation, we are able to progress margins into the low to mid-teens on a major, as you may see, a rising quantity of income and really feel like we’re constructing a whole lot of embedded revenue potential in that enterprise proper now.

Pat McCann — NOBLE Capital Markets — Analyst

Nice. Thanks for all the knowledge there. After which I suppose I wished to stick with healthcare companies right here for a second. Simply because I do know that you are looking at methods to broaden your choices there, in fact, the SelectRx enterprise is the important thing asset at this level.

However I am questioning, might you speak about any areas you are taking a look at to broaden that phase of the enterprise?

Bob Grant — President

Yeah, completely. We’re continuously sort of on the look and are launching into some new areas that we’re not going to share an excessive amount of at the moment. However most of them or all of them are very adjoining to our pharmacy enterprise and specializing in advanced a number of continual clients that we really feel like are very underserved as we speak, particularly extra rural-based. So we really feel actually robust in regards to the analysis we have accomplished and in the end, what we’re doing as to what these adjoining companies are that they will add not solely a ton of worth to the patron, but additionally a ton of worth to our service companions as we are able to drive prices down by higher healthcare literacy, higher connection, all of these issues.

And we consider that these will even have robust impacts on retention identical to we have seen within the Rx enterprise. So we really feel actually good about sort of the place we’re, however extra importantly, the place we’re going as we broaden the issues we are able to do for purchasers.

Tim Danker — Chief Govt Officer

Yeah. I’d simply add to that, Pat. I imply Bob has accomplished a extremely good job main this for the corporate. You possibly can see the fast development by way of Rx.

I feel it underscores, proper? There’s actual client demand. We have got clients with actual wants. We’re leveraging our core capabilities and buyer acquisition, buyer engagement, logistics, we predict driving quick worth into healthcare. So extra to observe, as Bob mentioned, however the good thing is we have got a whole lot of customers which have a whole lot of underlying wants that we predict that we are able to affect.

We have got the information, the method, and the engagement to have the ability to act on this. So we predict this can be a nice first chapter and lots of extra to come back.

Pat McCann — NOBLE Capital Markets — Analyst

Nice. And if I might simply ask another query, form of a normal query. If you happen to — wanting again on the annual enrollment interval and the open enrollment interval that that we’re popping out of. After which with CMS guidelines, eager about the upcoming AEP and OEP, — do you will have any — might you remark in any respect on form of the procuring atmosphere that we’re popping out of versus what you would possibly anticipate we’d go into and what implications that may have on your efficiency going ahead on the senior phase.

Bob Grant — President

Yeah. It was fascinating. All people — most individuals thought it might sort of be a delicate atmosphere final yr. But some carriers made some key investments that actually helped, and that created a extremely what we predict is a powerful atmosphere for us.

We consider that the identical factor will sort of maintain by this subsequent yr, regardless that there is a normal sort of pullback and there are some profitability questions from carriers, final time we noticed that occur, service stability from a few of the principal gamers which have been there for a very long time, sort of they took market share again whereas some carriers that grew, pulled again a bit bit, and that created a bit bit extra of a, I would say, larger shut fee atmosphere for us. So we really feel actually, actually good about that and really feel robust about the place that may take us. Despite the fact that we do assume there will be a normal sort of pullback by some carriers which can be struggling a bit bit on unit profitability within the quick time period.

Pat McCann — NOBLE Capital Markets — Analyst

Nice. Thanks a lot, guys. That is all I’ve obtained.

Tim Danker — Chief Govt Officer

Thanks, Pat.

Operator

We now have no additional questions. So I am going to flip the decision again over to Tim Danker for any closing feedback.

Tim Danker — Chief Govt Officer

All proper. Effectively, thanks once more to everybody for becoming a member of as we speak. I hope you may inform from our feedback, we’re very excited in regards to the future for SelectQuote. We really feel we’re very well-positioned to drive shareholder worth each instantly and the years forward, each in our insurance coverage distribution platform and healthcare service companies.

So we look ahead to sharing extra within the quarter forward as we begin planning for our subsequent fiscal yr. We need to thanks once more on your assist, and we look ahead to speaking to you quickly. Have a great day.

Operator

[Operator signoff]

Period: 0 minutes

Name individuals:

Matt Gunter — Investor Relations

Tim Danker — Chief Govt Officer

Ryan Clement — Chief Monetary Officer

Ben Hendrix — RBC Capital Markets — Analyst

Pat McCann — NOBLE Capital Markets — Analyst

Bob Grant — President

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